Apple's Massive Tax Avoidance Scheme Was Probably Legal

Apple used an impressively complex network of subsidiaries to avoid paying billions of dollars in taxes in a scheme that will pit the company against congressional investigators on Tuesday. But guess what? Lawmakers haven't found anything actually illegal in Apple's activities.

Essentially, Apple's scheme was an offshore web of subsidiaries on steroids. Here's how the New York Times explained it:

"Congressional investigators found that some of Apple’s subsidiaries had no employees and were largely run by top officials from the company’s headquarters in Cupertino, Calif. But by officially locating them in places like Ireland, Apple was able to, in effect, make them stateless — exempt from taxes, record-keeping laws and the need for the subsidiaries to even file tax returns anywhere in the world."

The U.S., they explain, determines the residency of companies based on their incorporation location, but Ireland uses their actual base of operations. So for tax purposes, for example, Apple's Apple Operations International — officially located in Ireland — exists nowhere. AOI accounts for about 30 percent of the company's total net profits worldwide from 2009-2011, according to USA Today.

Apple, who had $102.3 billion of $145 billion in cash overseas as of the end of March, has said that their offshore income reflects their international sales base, and that they already pay a ton of taxes: Apple says it paid $6 billion in taxes last year. They have at least $74 billion untaxed income offshore, according to the Times, which will remain untaxed unless the company moves the cash back to the U.S.

But that's all legal, thanks to a series of loopholes in U.S. tax code. So it seems that lawmakers, led by Senator John McCain and Senate Permanent Subcommittee on Investigations chair Carl Levin, are accusing Apple of breaking the spirit, but not the letter, of the law. It's part of a larger look at the tax avoidance practices of many major American companies, which seems aimed at finding a way to update what many see as an outdated tax code that allows for these shenanigans. The Times, again:

Investigators have not accused Apple of breaking any laws and the company is hardly the only American multinational to face scrutiny for using complex corporate structures and tax havens to sidestep taxes...Still, the findings about Apple were remarkable both for the enormous amount of money involved and the audaciousness of the company’s assertion that its subsidiaries are beyond the reach of any taxing authority.

“There is a technical term economists like to use for behavior like this,” said Edward Kleinbard, a law professor at the University of Southern California in Los Angeles and a former staff director at the Congressional Joint Committee on Taxation. “Unbelievable chutzpah.”

Here's what Apple CEO Tim Cook will say tomorrow in prepared testimony, arguing that the company's tax procedures are “authorized by US law” and comply “with all US tax regulations.”:

Apple does not use tax gimmicks. Apple does not move its intellectual property into offshore tax havens and use it to sell products back into the US in order to avoid US tax; it does not use revolving loans from foreign subsidiaries to fund its domestic operations; it does not hold money on a Caribbean island; and it does not have a bank account in the Cayman Islands.

After acknowledging that the company has avoided some of the biggest corporate offshoring cliches, Cook will ask Congress to consider tax reform that would reduce the 35 percent corporate tax rate and encourage companies to bring their foreign holdings back to the U.S.